Barry Eichengreen Keynote Lecture

The globalisation of capital

On 28 October 2021, the Rafael del Pino Foundation organised the conference live on the Internet through entitled "The globalisation of capital", which will be given by Barry Eichengreenon the occasion of the publication of the third edition of the Spanish version of the work of Barry Eichengreen of the same title published by Antoni Bosch Editor. After the lecture, Professor Eichengreen spoke with Manuel Conthe.

Barry Eichengreen is the George C. Pardee and Helen N. Pardee Professor of Economics and Political Science at the University of California, Berkeley, a research fellow at the Center for Economic Policy Research, and a research associate at the National Bureau of Economic Research. He is also coordinator of the Bellagio Group of scholars and government officials, a member of the American Academy of Arts and Sciences (class of 1997), and has been an associate professor at the Center for Advanced Study in the Behavioral Sciences (Palo Alto) and the Institute for Advanced Study (Berlin).

Manuel Conthe is Columnist and Chairman of the Advisory Board of Expansión. Manuel Conthe is an independent Spanish international arbitrator. A lawyer and economist, and former securities regulator, he is a recognised expert in finance, energy markets, M&A transactions, valuation of damages and, more generally, economic and corporate litigation. Previously, as a civil servant of the Kingdom of Spain, he was Director General of Foreign Transactions and Investments (1987-1988), Director General of the Treasury and Financial Policy (1988-1995), Secretary of State for the Economy (1995-1996), Vice-President for the Financial Sector at the World Bank (1999-2002) and Chairman of the CNMV (2004-2007). He was also a partner in a financial consultancy firm (2002-2004). During his years in Brussels (1996-1999) as Chief Advisor for Economic and Commercial Affairs at the Spanish Representation to the European Union, he was heavily involved in international trade and investment negotiations as well as in arbitration panels of the World Trade Organisation (WTO). He is the author of three books on economic and political paradoxes, game theory and cognitive biases in law and economics ("Behavioral Law & Economics").


On 28 October 2021, the Rafael del Pino Foundation organised a keynote lecture by Barry Eichengreen, George C. Pardee and Helen N. Pardee Professor of Economics and Political Science at the University of California, Berkeley, entitled "The Globalisation of Capital", on the occasion of the publication of the third Spanish edition of his work of the same title.

Eichengreen reviewed the recent history of the international monetary system. Fifty years ago, the Bretton Woods system came to an end after Richard Nixon's decision to end the convertibility of the dollar. US Treasury Secretary John Connolly said that the dollar was his country's currency and the rest of the world's problem. At the time, Federal Reserve Chairman Judy Shelton said that monetary policy had nothing to do with inflation and therefore the Fed could do nothing to reduce it.

The Bretton Woods system was special. The Bretton Woods monetary conference in 1944 was a unique moment in history, when a global monetary system emerged as a result of international negotiation. Previous monetary systems or institutions were designed on an ad hoc basis through separate national decisions that were eventually united into one system, as was the international monetary system that followed Bretton Woods in the 1970s.

Bretton Woods was the product of special circumstances. It reflects the fact that, in 1944, the United States was the only dominant power, the only international monetary and financial power, at least in the part that, during the Cold War, was known as the free world, and therefore had the ability to condition the course of negotiations. What happened in 1994 was what experts call an epistemic community, a community of experts that reached broad agreement on the desirable shape of the post-war monetary order. In 1944, the Second World War was still raging, making it all the more urgent for countries to reach a monetary agreement.

The thirty years following the agreement were a period of rapid economic growth. In the advanced economies, economic growth was the fastest in history. The coincidence of rapid economic growth and Bretton Woods suggests that there was something special, and coincidental, about it all. In the future, however, there will be no new monetary conference like Bretton Woods, because of the special circumstances that explain the success of Bretton Woods and that are difficult to replicate.

From a monetary perspective, today's world is different. The question is how different it is. For some authors, such as Reinhart and Rogoff, it is not really that different. Exchange rates were not flexible at Bretton Woods, but they are not so flexible today. Today, capital flows are more liberalised than in Bretton Woods, but countries like China still apply capital controls. In the Bretton Woods system, the dollar was the dominant currency at the international level and as a reserve currency, and it remains so today.

For Eichengreen, however, the international monetary system differs significantly. First, we have a widespread removal of capital controls in advanced economies, which makes the financial situation completely different. Although some emerging economies maintain capital controls, the increase in capital mobility has been significant. The post-Bretton Woods period has seen a significant increase in the share of emerging economies in the global economy and in the world's population living in democratic countries, putting pressure for financial account liberalisation and for policy to focus on objectives other than exchange rate stabilisation. It is no longer possible to subordinate monetary policy to the imperatives of the exchange rate system, so greater exchange rate flexibility is needed than was the case under the gold standard.

The collapse of Bretton Woods had a number of unintended consequences. The first of these is what is known as the Mussa puzzle. Michael Mussa, a professor at the University of Chicago and former IMF chief economist, observed that higher nominal exchange rate volatility implies higher real exchange rate volatility, but that this did not have negative consequences for international trade, contrary to earlier evidence, perhaps because of the development of hedging instruments and markets through which importers and exporters could hedge against exchange rate volatility.

The second unintended effect was that the expected decline in demand for foreign exchange did not materialise. On the contrary, governments and central banks increased their demand for reserve currencies, mainly dollars, especially China, other emerging economies and Japan. Countries recognise the need for more reserves to neutralise the undesirable effects of increased capital flows. Countries have been accumulating reserves to prevent their currencies from appreciating in order to maintain the competitiveness of their exports, known as the mercantilist model. The Asian crisis, moreover, led to the widespread adoption of what is known as the 'Greenspan-Guidotti rule', which says that foreign exchange reserves should be at least equal to short-term external debt.

The third surprise was that the move towards greater exchange rate flexibility was less general than expected. Managed floating and fixed adjustable exchange rate systems remain in place in a number of economies accounting for half of world GDP.

Moreover, the insulating properties of flexible exchange rates against external shocks have turned out to be lower than previously thought. This is due to a miscalculation of the effect of the financial sector.

The latest surprise is that the Triffin Dilemma has not disappeared, despite the collapse of the Bretton Woods system. The dilemma is that the United States did not have enough gold to back US bonds and facilitate liquidity in the international monetary system. In the 21st century we have a very similar version of the Triffin Dilemma which is that, as the rest of the world has grown larger than the United States, governments and central banks have more and more US Treasury bonds as reserves, the US government has to raise more and more revenue to pay that money when it is needed, which means that other international reserve assets will need to emerge or gain weight.

From this fact arise tensions between an increasingly multipolar world and a dollar-dominated system. In addition, there is a related geopolitical aspect, which is the sense that the US is an increasingly unreliable political ally, first under Trump and now under Biden. There is evidence that governments and central banks are hoarding reserves from their allies.

What are the alternatives to provide liquidity for 21st century globalisation? The Special Drawing Rights (SDRs) issued by the International Monetary Fund? The private sector does not use them in trade and finance. That is not its natural habitat: it prefers to do business in its own currency or in dollars. Moreover, we need a lender of last resort in the global economy. In the Lehman Brothers crisis it became clear that, in fact, the lender of last resort at the international level is the Federal Reserve, which opened swap lines with central banks around the world and was able to inject a large amount of dollars into the world economy to meet international demand for liquidity. It did so in a weekend. The IMF, by contrast, lacks the capacity to do the same with SDRs in such a short time frame, as seen in the allocation of SDRs earlier this year. It takes months, even years, to reach a new agreement among IMF shareholders. Therefore, as long as there is no local government, the IMF will not have the capacity to issue more SDRs in a weekend during an emergency situation. Therefore, too, SDRs will not replace the dollar in the international monetary system.

Can other national currencies with large platforms, such as the euro or the Chinese renminbi, be? Not much progress has been made in this respect over the last decade. The share of international reserves held in euro is the same as a decade ago, while the share of renminbi reserves has risen from 0% to 2%. The main obstacle, in the case of the euro, is a shortage of AAA-rated government assets. There are only four AAA-rated countries: Germany, France, the Netherlands and Austria. The total public bonds of these countries amount to three trillion euros, which is nothing compared to the sixteen trillion dollars of US Treasury bonds at the end of 2019. The European Recovery Fund is going in the right direction to correct this situation, but its size is meagre from this perspective. In short, there are not enough euros to be international reserves, or what has been issued is held by commercial banks to meet bank reserve requirements, or has been lent by the European Central Bank as part of its asset purchase programme, but is not available to banks in China, Japan or elsewhere.

In the case of the renminbi, capital controls limit foreigners' access to Chinese financial assets, but the obstacle is mainly political. Throughout history, any truly international currency has been the currency of a republic or a democracy, starting with the currency of the republics of Venice, Genoa, Florence, the Netherlands, Britain in the 19th century or the United States in the 20th century, because central bank managers counterbalance the actions of rulers, who are not allowed to issue a quantity of currency that breaks the rules of the game. Therefore, it does not appear that the monetary system will abandon the dollar because the Chinese government can break the rules of the monetary game. Under President Xi, China is moving in the wrong direction, concentrating more power at the top. If it can change the rules of the game that affect Alibaba, why can't it change the rules that affect the central banks that have the renminbi as their reserve currency? That is why the Chinese currency is not going to be a serious rival to the dollar in the short term. It may be conceivable to think of China giving independence to currency managers, but it is still hard to see China moving in the right direction.

What about cryptocurrencies? Cryptocurrencies are here to stay and will change domestic payment systems, but not cross-border ones. Cryptocurrencies, such as bitcoin, are too attractive for central bank managers to hold as a foreign exchange reserve. There are also stablecoins, such as Tether, which have a fixed one-to-one exchange rate with the real dollar. The stability of these currencies is an open question. Tether has only a small portion of its backing in the form of high quality liquid assets, so it may suffer from the same kind of speculation that has historically caused fixed exchange rate systems to collapse. Therefore, if stable cryptocurrencies can collapse, they will not be attractive for cross-border payments.

Central Bank Digital Currencies, or CDBCs, are probably here to stay. The People's Bank of the People's Republic of China is issuing them as an experiment. Other central banks, such as the Federal Reserve, will move more slowly. But CDBCs are coming and we will see more payments in China, with people using smartphones with an app they have downloaded to be able to use them. As far as cross-border payments are concerned, the Chinese CDBC can only be used in China. Central banks are exploring ways to make digital currencies interoperable. The Hong Kong Monetary Authority and the central bank of Thailand are working on a joint project called Inthanon-LionRock, but it requires very complex technologies and institutions. The Bank for International Settlements is working on a single platform for all central banks' digital currencies to circulate and exchange with each other. The problem is who makes important decisions about how the system works. The governance of the system would be much more complex than that of the World Trade Organisation. Therefore, it does not seem that central bank digital currencies will alter the international monetary system. The same applies to the e-renminbi. This digital currency can only be used in China, its use is limited to small retail transactions and it is not interoperable.

Are we better off today than under the Bretton Woods system? The current system is very different. Today we have more capital mobility than under the Bretton Woods system, fewer capital controls, more political democracy and a more multipolar economic world. But we also see the same kind of tensions as under Bretton Woods, including the mismatch between dollar dominance and the multipolar world economy, the 21st century version of the Triffin Dilemma and the continued reliance on the Federal Reserve to provide global liquidity. There is no clear way to resolve these tensions unless the euro and the renminbi overcome their obstacles and the Fed continues to accept its international responsibilities.

The Rafael del Pino Foundation is not responsible for the comments, opinions or statements made by the people who participate in its activities and which are expressed as a result of their inalienable right to freedom of expression and under their sole responsibility. The contents included in the summary of this conference, written for the Rafael del Pino Foundation by Professor Emilio González, are the result of the debates held at the meeting held for this purpose at the Foundation and are the responsibility of the authors.

The Rafael del Pino Foundation is not responsible for any comments, opinions or statements made by third parties. In this respect, the FRP is not obliged to monitor the views expressed by such third parties who participate in its activities and which are expressed as a result of their inalienable right to freedom of expression and under their own responsibility. The contents included in the summary of this conference, written for the Rafael del Pino Foundation by Professor Emilio J. González, are the result of the discussions that took place during the conference organised for this purpose at the Foundation and are the sole responsibility of its authors.